What happens when a loan is paid off regarding subrogation?

When a loan is paid off, subrogation comes into play, meaning the party who pays off the debt steps into the shoes of the lender regarding rights associated with that debt. In this context, when the payer—often a new lender or a co-signer—pays off the original loan, they gain the rights that the original lender held. This includes the ability to collect on the loan as if they were the original lender, establishing legal rights to the collateral securing the loan.

This principle of subrogation is rooted in the idea that the payer has a legitimate interest in ensuring that the obligation is fulfilled and that they can enforce those rights against any collateral or property. Thus, the correct answer reflects the legal mechanism that enables the payer, upon paying off the loan, to acquire the lienholder's rights effectively, allowing them to pursue any claim or ensure recovery through the collateral.

The other options don’t accurately reflect the effect of subrogation or the implications of paying off a loan. For instance, the borrower does not lose their rights to the property simply by paying off the loan; instead, they typically gain full ownership once the loan is settled. The original lender does not retain rights to pursue collection against the borrower after the loan is